Commercial Loan Agreements

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A Commercial Loan Agreement can be defined as a legally binding contract entered into between a lender, generally a bank, and a borrower, detailing all aspects and features of the monetary transfer involved in the commercial loan process.

Essential Clauses of a Commercial Loan Agreement

A standard commercial loan agreement contains:

The Introductory Clause: This clause contains details of the parties to the agreement including name and address of the lender bank and the borrower and the date of execution of the agreement.

The Definition or Interpretation Clause: The various key terms that are being used in the agreement are described in this clause.

The Condition Precedent Clause: This clause sets out the legal, financial and administrative conditions required to be complied with by the borrower prior to loan disbursement.

Representation and Warranty Clause: This clause focuses on the legal capacity of the borrower to enter into a loan agreement and ensures the lender bank that all factual and legal representations made by the borrower at the time of loan agreement are correct.

If any representation or warranty of the borrower is deemed to be erroneous prior to loan disbursement, the lender may withhold that disbursement. However, if such inaccuracy is discovered subsequent to the entire loan disbursement, the lender bank may declare the loan to be in default and demand repayment of either the entire loan or any unpaid balance from the borrower. This clause may include representation and warranties regarding:

(i) The formation of the borrower’s company as per the applicable laws;

(ii) The borrower’s authority over its assets and its right to conduct business;

(iii) The borrower’s authority to enter into agreements and perform the obligations set out therein;

(iv) The enforceability of the agreement against the borrower; and

(v) The borrower’s substantiation that there is no current default on any of its debts.

The Loan Term Clause: This clause deals precisely with the:

(i) Loan amount, date of drawing the loan and tenure of the loan;

(ii) The process of disbursement, drawdown schedule of the loan and security attached to the loan;

(iii) Repayment schedule of the loan, applicable grace period and penalties for late payment;

(iv) Interest computation, option for premature repayment of the loan;

(v) Right of assignment by either party; and

(vi) Lender’s right to set off any amount due under the Agreement.

Covenant and Undertaking Clause: This clause contains assurance by the borrower to desist from committing certain conduct that might affect the borrower’s financial condition or integrity during the tenure of the agreement. The terms of covenants and undertakings may either be affirmative or negative. Affirmative covenant includes a promise by the borrower to do something whereas a negative covenant includes a promise by the borrower to refrain from doing an act that might adversely affect the terms of the loan agreement. Some common covenants and undertakings by the borrower include:

(i) A promise to use the loan amount for working capital;

(ii) A promise to provide the lender bank with accurate annual financial statements prepared as per the established accounting principles of a specified jurisdiction accompanied by a certificate from an independent accountant;

(iii) A promise to let the representatives of the lender bank to examine its property and records, as and when required; and

(iv) A promise to notify the lender bank of any event of default that will substantially affect its ability to perform the loan obligations.

Confidentiality Clause: This clause prevents the parties to the agreement from disclosing any sensitive information to others and sets out the damages to be suffered by a party making such disclosure(s).

Events of Default and Remedies available: The lender has certain remedies available in case of:

(i) Default by the borrower arising out of non-payment of any due amount, whether principal or interest;

(ii) Failure to perform any covenant or term of the loan agreement;

(iii) Non-payment of any tax amount;

(iv) Misrepresentation of any warranty; or

(v) Deterioration in financial condition of the borrower in performing the obligations of the agreement.

The clause should provide a period for the borrower to rectify its default, if any. Any “cross default” clause should be given particular attention whereby default under one agreement triggers a default under another agreement. Remedies available to the lender bank by way of set-off or litigation should also be included in this clause.

Dispute Resolution: The parties shall have the right to refer to arbitration any dispute arising out of the agreement which they otherwise cannot resolve through negotiation or mediation.

Governing Law: The Agreement is to be governed by and enforced as per the relevant State or Territory law.

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